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So the June Media Metrix stats hit this past week (see subset here - Download June ComScore Engagement Report), and we're thrilled to announce that Meez.com is now the #1 US Internet site measured by engagement, meaning how long an average visit lasts, in this case an amazing 36.4 minutes. In addition, Meez is #4 in total engagement, measuring total minutes per visitor per month, showing that we're seeing lots of repeat visits as well. As I pointed out 5 months ago here, this means that Meez engagement has grown from 100 minutes a month per visitor in July 08, to 184 minutes in January 09, to an astonishing 227 minutes in June 09, and we're still going strong.

The end result is that we're seeing increasing numbers of users spending longer amounts of time in the Meez Nation virtual world, driving great rich media advertising results and rapidly growing virtual item sales. After a very tough slog in the past 6-9 months through brutal economic times, the team has driven the site to #1 in engagement, as well as to cash flow profitability, and now it's time to focus on growth to expand our leadership position in US teenagers.

Am coming out of first day of E3 2009, and it's actually a toned-down, but interesting version of what used to be the top video game show in the world before they lobotimized it in the past 2 years to try to reduce costs. Key to the show so far is not so much the blizzard of new hardware accessory or software announcements, but that Microsoft has doubled down on its XBox 360 strength, which is online services.

When one looks at the key players, it's clear that the Sony PS3 is the technically best piece of hardware, and that the Nintendo Wii is the most accessible hardware combined with the most accessible software, so it's unclear where MS would live this year, but the latest product announcements just emphasize where they're strong, which is online services. What's quite funny is that this is Microsoft's weakest area in the general Internet arena, having failed at every level to build successful online sectors in the general PC and mobile marketplaces.

So why is MS interesting? They introduced a set of compelling services, outside of the usual incremental upgrades. First is the actual Download service which allows users to bypass retail to download the full retail game directly to the hard drive - this is the first big move to take on not only general retail, but the always hated "second sale/used games" of Gamestop. Second is the integration with Twitter and Facebook - I'm personally not that interested in either function, but it shows the key move and thought by MS to deeply integrate XBox into the other popular areas where users are interacting - will drive a ton of awareness and traffic, although I think the Twitter part is more hype than reality. Third is the move to go to the Project Natal gesture-based video camera technology, which may be a lot of hype, but which shows the ability to introduce an entire new way for gamers to participate in games, in a very Nintendo-like way, through the camera - is too early to call it a winner, but it's certainly a great effort across the board from MS.

Having Nintendo and Sony come forth with new software, a PSP 2.1 (aka GO), some wacky new Nintendo concept called the Vitalizer, etc. is just not enough to make a difference. It's Microsoft's show, so let's see if they can deliver, but in any case, it's great to see E3 coming back as a global event.

Facebook announced yesterday (see here) that its CFO, Gideon Yu, had left the company and that Peter Currie would step in as "temporary financial advisor" while the company looked for a replacement CFO.

This is a really strong move by Facebook's Board of Directors to enhance the company's prospects as the financial pressure on the overall sector grows. Peter is one of the top financial executives in the US, having served as CFO of Netscape as it went public and was later sold, and also previously as CFO of McCaw Cellular, one of the pioneers in the wireless space. In addition, he's been on the boards of relevant companies such as Cnet and Sun Microsystems as they have gone through big changes in recent years, plus of course, he's previously been on two of my boards at Listen.com and at Meez, so I'm clearly favorably biased.

Peter is plugged-in enough to truly understand the power of a site like Facebook, cool enough to understand how to deal with a rapidly accelerating, seminal company full of young people, and yet has more than enough Wall Street cred to fully legitimize the company as it goes out to raise more money to fund its growth, and prepare to go public. The only question in my mind is whether FB can persuade him to stay on full time since it couldn't find a better leader.

One of the original reasons I decided to keep my talented, but flawed Blackberry Storm was that it was Rhapsody-Ready, meaning it could use the portable Rhapsody To Go music service so that I could stop carrying an iPod, plus my phone. It's a longer stor and later blog, but the Rhapsody To Go just doesn't work consistently well enough to recommend, unlike my amazing experience with the Rhapsody/Sonos/iPod Touch combination, which is earth-shattering (later post).

At the same time that I was getting rid of Rhapsody To Go, Slacker introduced its very cool caching Slacker Mobile Radio service. For those not familiar with Slacker, its CEO is Dennis Mudd, the former founder of music jukebox company MusicMatch, which was, hands down, the best multimedia/digital jukebox/internet radio software until Yahoo bought it a few years ago for lots of money, and then destroyed it, mostly by accident and neglect, and somewhat through plain stupidity.

Slacker's original mission (from what I can tell) was to build a very cool set of hardware that would allow a user to get a version of the great MusicMatch radio service onto a set of hardware that would allow a user to play it back offline, with no connection to the PC, satellite, etc, where they originally got the music. When the user later hooked up to the music source, the software would transmit the plays, the ratings (key part of software), and would then receive new music down to the Slacker hardware. This type of "offline interactive radio" is a special type of music and needs to be specially licensed from the set of labels, and it looks like Slacker did all of that work, and it raised tens of millions of dollars to build the buiness. It was actually a great idea until the multi-purpose IPod came along and destroyed that vision...

So while Slacker is rolling out this hardware, the iPod comes along, and is now followed by a variety of other smartphone players like Microsoft, Blackberry, Palm and Nokia, all of which are producing incredibly capable mobile hardware devices with lots of storage and Internet connectivity. So Slacker intelligently builds a free Blackberry version of its software - and the heavens open up.

I'm kidding, but the fact is that the new Blackberry Slacker software is game-changing - a user gets the same type of interactive radio that he/she would expect on a dedicated Slacker device, but it occurs on a Blackberry phone (needs big ass memory card, but most have it) and it works offline, which is 99.9% better than all Wifi-based applications on any device anywhere in the world. What this means is that unlike relying on the always uncertain 3G or Wifi service from Verizon, a user can download Slacker radio stations to the device itself, and the play it offline, not using any minutes or bandwidth from the phone carrier itself. This is game-changing - I want and now have the ability to just set a free radio music device (Storm) next to me on the way to Tahoe, and occasionally skip or recommend songs, confident that when I later sync the device, that more relevant songs will arrive - and it's all free, with a cheap subscription option granting more interactivity...

What do I mean? It means that I choose a bunch of radio stations, either popular genre ones like Country or I can choose specific ones like Matt Nathanson, and the Slacker system spits out a set of songs that match that radio station, and then it caches all of that music (many stations) on the ever bigger memory card on the phone - I can the play those songs without using the phone service or WiFi service - it's all already on the phone. You can skip and rate songs, among other features, but you have to listen to that stream of music vs choosing each song - when you sync up the phone to your PC, as many BB users do, the device uploads the songs, the preference, and then downloads the new songs.

How is the experience? The short answer is that since installing the Blackberry Slacker, I don't use any other music service on the phone, and I probably consume it 2-6 hours a day, every day (like I said, I used to run Rhapsody, so I like music) The long answer is that the service is technically easy to use and I'm huge fan of the music, but that it doesn't deliver the same breadth or quality as a Pandora or Last.Fm. The "new music" isn't that new and the "Rock Hits" feels stale, like it's a few months too old. These issues are apparently related to the type of license rights that Slacker has obtained, and it feels to me like even in the last few weeks that the overall music variety has been significantly increasing.

That having been said, I find myself increasingly using the Slacker service to the exclusion of other services like Rhapsody in the car & phone, so my view is that the cached radio service will probably satisfy 95% of the population, and Slacker does an amazing job of doing that vs almost any other service I know - it's a free, highly personalized, offline radio service - it's MusicMatch 2.0,and I highly recommend getting it.

Apple (APPL) today previewed the iPhone OS 3.0 due to launch this Summer. in addition to the expected improvements such as Cut & Paste, MMS, and Push Notifications, Apple intelligently moved to the forefront of the virtual goods line by implementing a system called "In-App Purchase".

This will allow users to purchase additional items from within an iPhone app rather than forcing them to either buy a separate app to fund their currency or forcing them to leave the app to finish the purchase - this could be game levels, virtual goods, Kindle digital books, in-app songs, etc. but the absolute key to this feature is that there is already ONE WALLET in the Apple system. Unlike the vast majority of social media sites which have ignored this approach, Apple has a central wallet which allows for one-click purchasing from a trusted source rather than forcing users to sign up for some whacky wallet system for each application they are using. It's almost impossible to express how much smoother this makes the overall purchase effort, thereby significantly increasing not just the initial revenue from a user, but all follow-on purchases, as we have found at Meez when we implemented it

Electronic Arts (ERTS) demoed The Sims 3 on stage using the system to purchase additional avatar items from within the app, and one can easily now imagine the wide array of revenue models this will open up for app developers, all of whom will be thrilled to share 30% with Apple in order to tap this capability, which will start to drive increased profitability from the Apple Store. It's the same options everyone has been begging for from MySpace and Facebook for months, but with no results for reasons few can understand, although the 3rd largest social media site Hi5 this week announced a similar system.

The only downside I can see is that Apple is currently limiting the functionality to paid applications, and not for free ones. I'm not 100% sure why that would make sense unless they are trying to favor the paid applications by holding back this compelling functionality since the "free to play" virtual currency model obviously makes more sense for "free" applications like Poker than it does for paid applications which will have fewer users by definition of being premium. The advantage from Apple's view is that this should focus more developers on paid models by giving them another revenue source on top of the initial payment, and it will leave the free applications as true demos or lite versions.

In any case, this is a huge step forward for the virtual item-based world since it will trigger an increased level of innovation in this area, which is what we at Loki Partners have been preaching for months since it's the perfect complement to the declining advertising business, and it will supplement the premium model as well. It's great for developers and it's great for Apple as well. Now let's see what the other mobile competitors do, as well as the big social media sites.

McDonald's Corporation (NYSE: MCD) is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonalds started in 1940 and yet in February 2009, 69 years after it launched, it again turned in a stellar sales month, increasing same store sales 1.4% over the previous February, in spite of one fewer day and a horrible economy. This wasn't always true - 10 years ago, the critics were saying that McDonalds was over in the US as a growth company, that the format was tired, and that it would never again increase sales. But instead, a series of new CEO's (the old ones kept dying) re-invigorated growth by refocusing on the core business of serving fast, simple, value-priced food to its customer - the company has since continued to increase its same store sales almost every single month, which is the key business health indicator in most retail businesses.

So how is that relevant to virtual economy-based companies? It's becoming increasingly relevant because some of the more "mature" virtual economy-based firms are starting to see slower sales in their core business, leading some critics to say that a virtual item business outside of China or Second Life just can't exceed $2-3M a month in revenue. That statement is wrong, but let's look at the reasons behind it.

In the last few years, the rise of social media and community sites has created hundreds of companies of that have millions of registered users, lots of repeat visitors and high levels of engagement. For example, our virtual world Meez is now #10 in the US in overall engagement with 2M+ monthly unique visitors, or Inside Social Games lists here more than 25 Facebook games that had 1M+ users in February- these sites and games didn't exist 2 years ago, but are now growing like crazy.

In spite of all of this engagement, or sometimes because of it, advertising rates have simply plunged due to massive over supply of impressions, a weak economy, and low click through rates on traditional display ads since the users are engaged in a discussion, not a commerce experience. Therefore, many sites have intelligently begun to roll out virtual currency systems to enable their more committed users to purchase different types of status - each time the site rolls out different things to purchase, the revenue goes up. At Meez it went from avatar items to virtual room items to in-room animations to gifts, etc. So you keep rolling out more things to buy, and revenue increases, but generally less so with each new feature.

Then the last thing new virtual economy sites do to increase revenue is to increase the number of ways to purchase virtual goods. At Loki Partners, we've studied a wide variety of virtual economies and the most popular payment options in order are credit cards, Paypal, mobile, pre-paid cards, Offers/cpa/surveys, and cash in the mail, but this vibrant industry keeps producing new ways to facilitate currency purchases. Each time a site offers a new payment option, revenue increases 10-20%, although that decreases with most succeeding options as the law of diminishing returns kicks in.

So now what does a virtual economy-driven site do? It has lots of engagement, lots of things to buy, and lots of ways to buy the currency. Well, it's kind of like McDonalds - once you've saturated the country with stores, and your stores can't hold any more equipment, and you can't generally increase prices, then in order to keep growing, you actually have to run a business, and not just throw payment options and new items at the users with no real method behind the madness - its far more effective to run your business more efficiently than to continue to market to new users or to always build new games.

As the Wall Street Journal stated today in its big McDonalds article (here) about how the company is continuing to grow: Behind the effort is an increased focus on examining reams of customer
data measuring everything from whether customers are trading down to
smaller value meals or dropping Cokes from their orders to exactly how
much they're willing to pay for a Big Mac. "I love numbers," Mr.
Alvarez says. "I think data used well really tells a story."

And that is the key driver: DATA/ANALYSIS. Eventually a business has to truly understand its operations, such as what's driving purchases, what type of user is buying items, which items are they buying, are the prices elastic or inelastic, which purchase methods are used by the most profitable customers, where do the most profitable customers come from, etc?. Many virtual economy sites I see can't even produce a simple report detailing their Money Supply/M1 - that means each week did the economy grow in the overall money supply or shrink, and if so, what were the top sources of currency, and what were the top sinks of currency? Without that type of Analytics and Reporting, sites will never be able to approach McDonalds way of steadily growing their revenue each month, even without driving more customers or building more stores, both of which cost more money.

One example is that in Q3 2008 at Meez we looked at our overall economic reports and we saw that there was too much currency coming into the economy - no user ever really had to buy anything. Therefore, we significantly adjusted how we awarded currency in return for labor - we reduced the number of coinz given initially at sign-up, we increased the spread of prices of our goods, and we really pulled back on the number of coinz given per level of game while increasing the coinz awarded for certain game trophies - this significantly increased our monthly revenue while still driving the type of user behavior we were trying to incent.

None of this would have been possible without a sophisticated reporting and analytics system which took us way too long to build, so make sure you either have a good team to build one as a key part of your business, or go license a system like TwoFish (where I'm on the Board) or a similar system which provides that deep level of analytics, reporting and catalog management. It's the only way to organically grow a site's virtual item revenue once you have tapped out the other obvious methods - it works for McDonalds and it will work for your sites as well as we all drive the virtual goods business to $1B+ in 2010.

Update: Benchmark partner Bill Gurley just published a similar, but far more analytical post about the same topic (here)

After having the same conversation multiple times last month at Casual Connect Europe (see post here),
as well as with numerous other big social communities, the easiest way
I can express the value of virtual goods to non-gaming and non-virtual
world sites is that Only Virtual Goods Will Pay for Community Features.

What
do I mean by that? If you have a general consumer-oriented site that
has community features (forums, chat, profiles, IM) as a big part of
its traffic, then you have no way to currently pay for it, even if it
has tons of traffic. There is very little commerce taking place in
general community sites, few profitable advertisers want to be any
where near this type of user-generated content, and almost no users
will pay a separate subscription fee for it. Yet community features
are driving the bulk of a site's traffic, producing tremendous
time-on-site stats, and page views per visit - all at less than $.05
CPM (and declining), especially if you have a decent portion of non-US
traffic.

Where virtual commerce enters the equation is that it is
the ONLY proven method where active users in a community will pay tens
of cents per month per user to:

personalize their experience

differentiate themselves from friends

thank people for doing something

show off for others

flirt with some users

simply waste time with friends

in general, pay to be noticed

Those tens of cents per month quickly add up to tens of thousands of
dollars per month in total revenue for smaller sites, and hundreds of
thousands of dollars per month for bigger sites. For a huge site like
Facebook, even its relatively primitive gifting program generates
millions of dollars per month, and that's by barely trying. For a site
with non-US traffic, it's even more important to drive this business
since few countries outside western Europe and the US can support a
robust advertising solution, yet those countries have hundreds of
millions of Internet users. Hi5 and Tagged have realized this and are busily rolling out entire virtual goods economies.

Some folks I speak with seem to
believe this will only work for hard core gamers or for teenagers. The
data from Meez and other similar sites like Pogo actually shows that women aged
25-54 will pay the most for virtual commerce, and they do it in a wide
variety of sites, not just in gaming ones, so it will work well for sites like BabyCenter, CafeMom, and TheKnot.

If you have a site
with a big set of community features, and you're not offering a rich
virtual commerce program, you're just leaving money on the table, which
is a tough thing to do in this environment.

Comscore recently released their January 2009 numbers, and Meez has now broken into the US top 10 in overall engagement for the top 2000 sites, concretely demonstrating the power of the MeezNation virtual world to draw users in for long periods of time, and to persuade them to repeat the experience multiple times per month.

In numbers, what does this mean? In July of 2008, 6 months ago during the Summer months, Meez visitors were on the site 100 minutes a month according to Comscore - this was a strong, although not leading position, but MeezNation had just launched. In the last 6 months, Meez engagement has grown 84%, with average minutes per visitor now at 184 minutes a month as of January 2009, which makes Meez #10 in the US, above Facebook, GaiaOnline, IMVU, WeeWorld, NeoPets, MyYearBook, and Zwinky, to name a few popular social media sites - that is an astonishing growth pattern!

In today's difficult advertising world with rapidly declining CPMs, user engagement is a key driver from an advertiser perspective, and Meez is now demonstrating that strength, both in day to day performance and now in Media Metrics public recogntion. In addition, as I have repeatedly posted about at virtual goods consulting firm Loki Partners, engagement is the top indicator of user interest in buying virtual goods, which is why the Meez numbers continue to accelerate in that area, driving the company to profitability by Q2.

Just got back from Casual Connect Europe, which is the annual 3-day European casual games gathering in February, historically in Amsterdam, and this year in Hamburg, Germany. My general thought is that there were no huge trends dominating the show, as there have been in the past.

However, my 5 key takeaways were:

1. Amazon - is causing large initial controversy by launching a downloadable game program (here) through its purchase of casual game pioneer Reflexive Entertainment. The issue is that front line casual titles were traditionally priced at $20, even though there were numerous ways to buy them for as low as $10 through club memberships, and other periodic discounts. What Amazon (NASDAQ:AMZN) has done is price titles out of the gate at $10, with even lower prices for older games. Their argument is that it will drive a much higher level of sales, especially through the power of Amazon's system. Some of the publishers are vigorously resisting this approach since it has the potential to drive all pricing below $10, with club prices now being even lower, so some of them are pulling their games from the system. However, participating publishers like iWin, Hipsoft and Last Day of Work seem to be dominating the sales charts, so there is a good supply of content at this point. No one has received Amazon sales reports yet, so it's too early to tell, but my guess is that Amazon will eventually win over almost all of the game publishers since it will become such a large distributor of games, but it points to lower prices in the medium term.

2. Virtual Goods - obviously near and dear to my heart (see Loki Partners), the larger portals and publishers are all finally looking to expand their community efforts to become more than just commerce engines. Then in order to monetize it, they wish to sell virtual goods to that audience, either in the game itself, or around the game, as Pogo has successfully done for some time now. As SuperRewards and TrialPay pointed out in their panel, this approach can drive a lot of additional revenue, especially as last year's Holy Grail, in-game advertising, is dropping off quickly in the slow economy. We will finally see numerous players launch big virtual goods programs this year, and as developers integrate those API's, we'll see in-game virtual items become more common, which is a big win for back-end virtual goods providers like TwoFish, where I'm a board member.

3. IPhone - everyone is pouring on to the Apple iPhone (NASDAQ:AAPL) platform, hoping its yet again another platform to sell the same classic content such as Bejeweled or Diner Dash. The early signs are good, with games taking just a few months to port to the device, and some publishers seeing good sales. However, with 15,000 applications already on the platform, marketing is becoming a big issue, which has never been a strength of casual game publishers. who have mostly relied on game portals. In addition, pricing compression is taking place, with initial attempts to hold pricing at $7.99 or $9.99 quickly dropping to $4.99, and then moving lower to $2.99 or even worse, making it impossible to generate substantial revenue.

4. Growing Eastern European Publishers - the first wave of games from the Eastern European and Russian game publishers were generally of lower quality and were often just straight clones of popular Western games. In the last 12 months, Playrix, Alawar, Realore and other similar players have made huge strides in game quality and creativity, and the pipeline for 2009 looks really strong, making them important players in the casual game ecosystem, especially as they build up their portals and begin to distribute more games for other developers and publishers.

5. Need for Consolidation - what's becoming increasingly clear is that the casual game industry is finally hitting the level where the larger companies such as Big Fish Games, Wild Tangent, and Real Games (NASDAQ:RNWK) are separating themselves from the smaller players, which wasn't as true 2 years ago. There are numerous smaller publishers in the $5-25M revenue range that simply aren't big enough or sophisticated enough to increase revenue in a rapidly evolving system. When it was just creating and publishing downloadable games, a lot of companies could be legitimate players. Now that it's increasingly about publishing on multiple platforms, adding multi-player, community and virtual goods functionality, attracting well known brands to certain games, and most importantly, getting big enough to not get squeezed by larger distributors, it's time for the smaller players to decide if they want to be lifestyle companies, or they wish to be part of a bigger play. We know the casual games business is big enough to support multiple public companies, but they must have $100M+ in revenue, plus a lot of growth in order to do that, and that will require consolidation, and at far lower valuation multiples than seen in the past.

Big Congrats to Jessica Tams from Casual Connect for again pulling off another great show. As for Hamburg vs Amsterdam, I can see the practical reasons why the
show moved to Germany, but I still feel we left a little bit of soul
behind in Holland.

I had been ignoring this topic for the last 2 weeks since it involves a neighborhood acquaintance and because I thought it would go away, but as the Stephen Fowler saga grows, it's hard to avoid. What's more fascinating than rehashing the train wreck that took place two weeks ago on the ABC Show Wife Swap, is to see the national reaction to it, now magnified 1,000 times through the Internet vs where it used to be localized through talk radio or letters to the editor.

The short story is that, as is typical for this reality show, two different families "swapped wives" for two weeks - one family is a stereotype flag-waving, fast food-eating, mid western family and the Fowler family is the stereotype liberal, well educated, San Francisco family. Renee Fowler has her own drama down there about eating better, taking walks vs riding ATV's, etc., with some tears involved, but it all works out well in the end. Stephen Fowler, on the other hand, loses his mind and acts like a complete ass, repeatedly and deeply insulting the transplanted wife in various ways in front of his children, all on national TV - the overall summary and central venting point can be seen here at Stephen Fowler Sucks.com.

The details aren't that important, but the reaction was fascinating, extreme, and now instantly national through the power of the Internet. For whatever reason, this episode simply struck a very negative chord with a wide number of people. It's not as if this is a murderer, or as if he's a Bernie Madoff style swindler, but wow have people gone nuts about it, now a full two weeks since the episode showed - the ABC guys must be thrilled since it's a reality show dream. A friend of mine even called Fowler the "first anti-hero" of the Internet.

Some stats

Stephen Fowler as #1 term on Google Trends for a couple of days

Wife Swap as top rising term on Google Trends

200K+ You Tube views, even though the copyrighted videos keep being pulled down

Not one, but 2 apologies from Renee posted to Internet when the first one was rejected

Stephen resigned from all of his 3 board of directors

A 640 member group on Facebook is created called I can not stand Stephen Fowler

Police Car needed outside Fowler house due to threats, especially since the Fowler address and personal info has been posted all over the web

House is egged, as is neighboring house by accident

Fowlers having to pull down all work and personal Internet sites, change phones, etc.

In general - a total destruction of one's life, all due to a reality show

Was it a horrific idea to go on a reality show and act like a massive jerk? Of course, and the behavior simply isn't defensible, although we see far worse behavior on other reality shows. Do we all have better things to do with our life, like worry about increasing unemployment, the rise of China/Russia/India, massacres in the Darfur, etc.? Apparently not, especially since this is such a great release.

The Internet has magnified the ability of crowds to communicate, both with each other, and about each other when pissed off. In some cases it does amazing things, like keep obscure languages alive, or allow users to communicate for free across the globe. In other cases, it has now become a virtual lynch mob, and I think the Stephen Fowler saga will eventually be a great case study for one of the early ways that large numbers of people vented their unhappiness around the country about a bizarrely popular topic. On the other hand, the demise of Juicy Campus may show that some of this activity is short-lived, primarily because you can't build a business around it.